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October 26, 2016

Divisions within the Democratic party are somewhat mute during these final weeks of the presidential campaign. They won’t remain quiet for long.

Intra-party completion and introspection will soon dominate Washington. As Republicans attempt to sort out (again) the future of their beleaguered presidential party, Democrats looking forward to a bit of euphoria on November 9 will have their internal issues to confront.

The most significant continues to be the divisions that involve Wall Street and bankers. Progressives lead by Elizabeth Warren and Bernie Sanders have made plain they will confront accommodationists in the outgoing administration and its likely successor.

Warren has been particularly active here, excoriating federal regulators for avoiding criminal charges against the likes of Wells Fargo CEO John Stumpf and calling on President Obama to fire SEC chair Mary Jo White.

Another issue testing the Democratic exists in the complex area of Treasury regulations.

This past April, the Treasury Department proposed several regulations to crack down on corporate inversions, the process by which a US company reduces its tax burden by organizing legally in a more reasonably taxed nation. One new rule, under the authority of Section 385 of the Tax Code, will allow the IRS to reclassify some company debt as equity, thus changing the corporation’s tax consequences. 

While the goal fits into the regulatory worldview of Senator Warren, the means may not.

The new rules may end up as a future case study on the unintended consequences of policy-making. A far-reaching and quite broad regulation may sweep up conventional internal cash management techniques as it attempts to limit inversions.
 
A bipartisan group of Republican and Democratic lawmakers, along with business organizations, have expressed serious concerns to Treasury about the regulation.
 
Senator Warren’s Massachusetts is home to 12 Fortune 500 companies, including Boston-based Liberty Mutual, which is likely to feel the impact of the rule’s unintended consequences of increased compliance costs and a rise in the cost of capital for investment. The new regulation may also prove ironic with benefits accruing to the nation’s largest banks as corporations turn to outside help to now manage their cash transactions.

A recent Inside Sources story noted:  “The prospect of that tool vanishing has led corporate finance experts to contemplate a world in which businesses will dispense with managing the cash themselves and outsource the job to banks. The only banks capable of that kind of complex debt finance? Wall Street giants like Citigroup, JPMorgan Chase or Bank of America, British ones in London, or even the Chinese giants of the future. ‘If a company can’t lend to itself, it will go to a bank,’ said Catherine Schultz, vice president for tax policy at the National Foreign Trade Council.”

According to the Wall Street Journal in an editorial, “Banking is one industry that might have been expected to cheer the rules. That’s because the proposal would likely force companies to use banks for many transactions that until now have been handled internally by a corporate treasurer.”

A rule intending to curb inversions may well end up benefitting the balance sheets of the nation’s largest banks. This is a sticky wicket for progressive Democrats who’ve chafed under Obama administration’s approach to regulatory matters and for whom striking a blow against inversions would prove a badge of honor.

Support by Democrats like Warren or Sanders for the Obama Treasury rule may come down to what they dislike more: inversions or “too big to fail” banks. Not an easy choice and one sure to cause some post-election discomfort within the Democratic coalition.

Treasury regulations, Hillary Clinton

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